Mining tax bungle: the blame game over poor policy

The 2010 mining tax debacle must still really hurt. Kevin Rudd was talking about it during his leadership challenge. His version of events is that Wayne Swan promoted the idea and then bungled the implementation, ultimately leaving Rudd out of a job. Not so says Swan.

Either way it is clear that both Rudd and Swan have different recollections of the mining tax debacle and, as reported in The Australian, there is bad blood between them.

Robust debate between politicians on matters of public policy shouldn't be that newsworthy. But it seems the mining industry have the same recollection as does Rudd and Swan won't let it go.

In an essay published in The Monthly and a Press Club speech Swan has accused the mining industry - or one per cent of the industry - of rent-seeking. He has even named some of the 'rent-seekers'. Now while we might commend the man for not taking a backward step, the Treasurer of Australia should not get into public slanging matches over 'who said what to whom when' issues.

Labelling someone a rent-seeker is the economists' ultimate insult. Those who lobby government for special privilege to gain unearned income are the lowest of the low. Miners simply don't fall into that category. Quite the opposite.

Swan complains about individuals who oppose government policy. In particular, those who oppose his policies to introduce new forms of taxation. He invites us to believe that individuals who don't want to pay even more tax than they currently do are rent-seekers, i.e. trying to get a free ride.

Swan complains about individuals who conflate their own interest and the national interest. Yet poor economic policy can never be in the national interest. Sure making the tax system more efficient might be in the national interest, but that isn't what the mining tax was all about.

The mining tax that was proposed in 2010 was a poorly designed, poorly implemented policy. For all of Wayne Swan's protestations the historical record supports the view the tax was bungled from beginning to end.

The biggest mistake the Government made was not understanding how the tax would work. A 'small' detail like that could have been overcome if the Government had consulted with industry before announcing the tax and before including forecast revenue from the tax in the budget.

The tax was particularly complex involving the Government having to take virtual ownership of 40 per cent of mining operations that would be financed by a loan from the miner to the Government. The Government would pay the long-term bond rate on the loan, but the miners would have had to have financed that loan at their own cost of capital - well in excess of the long-term bond rate. While Treasury realised this aspect of the tax would be problematic, they didn't understand the full implication of this feature.

If your eyes have glazed over at this point, that is quite alright. What isn't alright is that Treasury didn't understand the significance of this problem until after the tax had been announced. The tax was fatally flawed. To be fair, Swan couldn't have known this - but without consultation how would he ever have found out? He didn't. By all accounts he still doesn't understand why his mining tax failed.

Why didn't Swan have a genuine consultation with the mining industry before the tax was announced? In Freedom of Information documentation released in early 2011, it is clear that Treasury anticipated a consultation process. One document dated February 10, 2010 indicates a 'Long process envisaged' with four dot points 'core features on announcement', 'education and familiarisation', 'consultation on technical issues', and 'commencement July 1, 2012'.

Another document dated February 21, 2010 indicates that a 'Final Design Paper' would be released six months after the policy announcement. The announcement would contain a principles paper to be followed by 'high-level consultation', then the release of a 'consultation paper discussing technical and design issues' including 'stakeholder submissions and ongoing meetings'. Ten months after the announcement Treasury expected an 'Exposure Draft and Implementation Details' to be released 'for consultation'.

Yet none of that happened. If Treasury was expecting a long, involved, and detailed consultation process, why is Swan now telling us that his office never gave such an undertaking? Clearly sometime between February and May the Government changed tack and decided to forego the long consultation process that had been planned. As late as May 2, the Government promised to undertake a consultation; yet on May 11 the tax was included in the Budget Papers as fait accompli. At this point any 'consultation' was simply going through the motions.

The miners weren't told about the change in plan and now it seems neither was the Prime Minister. Unsurprisingly Wayne Swan has had to go on the attack.

Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs. Follow him on Twitter @sincdavidson. View his full profile here.

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